Weekend Argus (Saturday Edition)
Ultra-careful approach keeps paying off for Prescient fund
PRESCIENT INCOME PROVIDER FUND
through a full interest rate cycle, while aiming never to lose capital over a rolling three-month period.
According to the fund’s fact sheet, it invests in local and offshore money market instruments, bonds, listed property, preference shares, inflation-linked bonds and derivatives.
Meyer Coetzee, a director of Prescient Investment Management and the head of retail, says that, since the fund was launched 11 years ago, it has delivered, on average, a return of nearly four percent above inflation a year, before fees.
When selecting assets, Meyer says the departure point is to ensure that they will not result in the fund under-performing inflation over any one-year period. The managers then select instruments that will generate the fund’s return objective.
He says the fund’s exposure to high-yield, short-duration, fixed-interest instruments has been the main driver of the fund’s out-performance over the past three years. The fund has had significant exposure to cash and good-quality, short-dated floatingrate bonds.
Although the fund can invest in equities and listed property, it will not diversify into these asset classes simply to generate shortterm out-performance at the risk of incurring capital losses.
(The fund currently has less than three percent in local listed property and 2.5 percent in preference shares.)
Meyer says one of the drivers of the fund’s returns over the past three years has been exposure to offshore assets.
“The challenge with offshore assets is to manage the currency risk within acceptable levels for clients with a risk profile consistent with the Income Provider Fund, because the exchange rate is notoriously volatile. The fund’s current offshore exposure is 15.5 percent, but, for a number of reasons, all the dollar exposure is hedged to rands,” he says.
“With yields on dollar assets of about three percent and a currency forward premium (the differential between local and United States interest rates) of about seven percent, the fund currently earns an average yield of 10 percent or more from this asset class. This is well on par for the overall return target of CPI plus three a year.”
The main factors that underpin the fund’s investment approach are:
• Credit quality. The fund uses comprehensive, strict processes to check credit risk before it invests in bonds not guaranteed by the government, such as those offered by banks and listed companies. The aim of these processes is to ensure that the potential rewards outweigh the risk of credit defaults.
• Duration. Broadly speaking, the longer the term, the higher the risk, but also the better the prospect of higher returns.
• Hedging offshore exposure. “When the dollar strengthens relative to the rand, holding foreign assets results in higher returns,” Meyer says.
“However, the opposite is also true; hence holding offshore assets can result in significant risk for the fund. For that reason, the fund has locked in the great returns it has enjoyed over the past number of years by hedging the currency risk.”
The Prescient Income Provider Fund is managed by Cape Town-based Prescient Investment Management Company, where the interestbearing division is led by veteran investor Guy Toms. The minimum investment amounts are a lump sum of R10 000 or R1 000 a month. – Mark Bechard